Leverage Ratio Arbitrage All Over Again — Liberty Street Economics

Donald P. Morgan, Dong Beom Choi, and Michael R. Holcomb Leverage limits as a form of capital regulation have a well-known, potential bug: If banks can’t lever returns as desired, they can boost returns on equity by shifting toward riskier, higher yielding assets. That reach for yield is the leverage rule “arbitrage.” But would banks… via…